There will always be crises, so let’s boost resilience

by Nitin Pangarkar, Associate Professor, Department of Strategy & Policy, National University of Singapore (NUS) Business School

The ongoing COVID-19 crisis has adversely affected many economies, including Singapore. Generally, crises are unpredictable and this crisis is no exception. This crisis won’t be the last either, though future crises may not be as severe in their impact. The common denominator across all crises (past, present and future) is their adverse impact on businesses, making crisis preparedness a critical requirement for companies.

Small- and medium-sized enterprises (SMEs) are a big contributor to the Singapore economy accounting for 48% of its GDP, employing about 65% of its workforce and constituting 99% of all its enterprises. Beyond the numbers, SMEs add to the dynamism of any economy.

The ongoing crisis has hit SMEs hard because they lack buffers such as accumulated profits, deep pockets such as access to credit facilities, or the diversity of products and geographies that can lend some stability to revenues and profits during crises. These issues are compounded because many SMEs don’t pay sufficient attention to either strategy development or refinement, and/or long term planning.

In a crisis, SMEs need to ensure survival first. But, while ensuring survival, they also need to look beyond the crisis because every crisis has a finite life. Hence, even while the current crisis is unfolding, SMEs will do well to boost their resilience for future crises. Below, I identify a five-pronged action agenda that SMEs can follow to bolster their defenses against crises.

First, the balance sheet. To remain a going concern, a company needs to manage its finances and a company’s balance sheet is a key barometer of its financial health. SMEs should aim to build the strongest balance sheets they can. When they are generating surpluses during the good times (and hopefully the good times will come in the future as well), it is important that SMEs squirrel away funds for a rainy day. Prudent debt management also means three things: avoiding debt unless essential and, when internal funds are not available; using debt for funding capital (fixed investments) or building a “stock” of essential skills (e.g., related to branding, customer service or productivity improvements) for long term performance; and not using debt to fund day-to-day expenses.

Second, a lean cost structure. SMEs should also aim to have a lean cost structure, which can serve as a buffer against any drop in volumes in the future, because of crises or otherwise. While aiming to become lean and mean, it is important to not lose sight of the key strengths, especially key people, because ultimately, many businesses are people businesses. It is important to lose the fat, but not the muscle, such as trained and knowledgeable employees. Being lean and mean is a matter of mindset and looking to be cost-effective in everything that a company does. It is also about continuous efforts to lower costs, instead of viewing cutting costs as a one-time exercise. SMEs can also achieve cost-efficiency by adopting technology, especially when it can improve productivity.

Third, embracing new business models. Being small and informal, SMEs often enjoy the advantage of flexibility and agility. They should use this flexibility to embrace new business models. Partnerships can be especially crucial for SMEs because they can focus on their strengths while leaving other activities to partners, thus conserving scarce resources. Technology is making possible collaboration like never before. It is also important to remain dynamic and open to new ideas beyond partnerships.

Fourth, investing in durable assets. SMEs must invest in durable assets that can yield them benefits in the long term. Branding and human capital development are two examples. Similarly, building strong customer relationships and a reputation for being a reliable and trustworthy partner to vendors are important as well. Many durable assets take time and significant investments to build and it is important that SMEs not sacrifice investments in durable assets for short-term considerations. Training for instance should be maintained as much as possible, especially if the SME is in a service industry. Technology investments should, again, be maintained as much as possible for long term competitiveness.

Fifth, diversity of customers, geographies and industries served. SMEs need to seek diversity in terms of the customers and industries they serve and the geographies they operate in. This diversity can be an excellent defence against economic downturns because any crisis or downturn seldom impacts all industries and geographies equally. In the current crisis for instance, the impact on the economies has been different across countries even within the Southeast Asian region (e.g. Malaysia versus Indonesia) and a SME with operations spanning multiple countries may enjoy greater stability in revenues and profits. Greater learning opportunities are another potential benefit of this diversity and SMEs’ small size and consequent informality, and flexibility put them in an excellent position to capitalise on these opportunities.

In conclusion, while adversities such as crises take a toll of companies regardless of size, SMEs are especially vulnerable. The strategies suggested above can improve SMEs’ likelihood of surviving crises.

The opinions expressed are those of the writer and do not represent the views and opinions of NUS.